SEVEN WEEKS HAVE PASSED since our last commentary, though it was designed to go out weekly. Over that time, the major indices have moved very little. By the numbers, for the seven weeks ended Friday, March 5, 2010, the Dow Jones Industrial Average closed at 10,566, down 43 points, or 0.4%. The Standard & Poor’s 500 closed at 1138, nearly unchanged from 1136, and the NASDAQ Composite closed at 2326, up 38 points, or 1.6%.



The equity markets have trended up so far this year. We suspect this is driven more by investors looking for yield, than any real confidence in economic fundamentals. Washington continues to exude confusion and uncertainty, and Wall Street has been written off as a meaningful source for solid investment ideas – at least for anyone other than their promoters.


History tells us that the long term trend for stocks should be up. We concur, though this trend will most likely bring short term volatility. As has been noted elsewhere, the S&P 500 returned -0.5% annually over the last ten years. This was nothing but a reversion to the long term average of 10% annual gains, as the nineteen years ending in 2000 saw an 18% annualized return. The only other decade that saw negative annual returns was the 30’s, with an average annual return of -0.2%.


At the moment, the overvalued asset class appears to be bonds. Bonds have had annualized returns of 5% or more over the last several years, depending on which bond type is in question. In 2009, more than ten times more dollars went to bond funds than to stock funds.


In business news, Coke has purchased its largest bottler, Coca-Cola Enterprises. It will be interesting to see how this integration works. Chile and Turkey, like Haiti and AIG, have been hit by earthquakes. The countries are rebuilding. AIG appears to be rebuilding as well, starting with selling off units to raise cash and pare debt.


Greece is only the most obvious example of being satiated with debt. Sovereign debt loads around the world are staggering, in the size of their raw numbers. Some have suggested the end of the world as we know it, as a result. Productivity is the solution. One of the sure courses to productivity is to remove the tax incentives to carry debt, and to remove the tax penalties for putting equity to work. FairTax is still a superb solution.


The official unemployment rate is holding steady, at just under 10%. This doesn’t include the underemployed, or those who have simply given up. Employment is generally a lagging indicator of economic health, as companies find ways to create profitability with fewer employees during economic down cycles. The third and fourth quarter 09 nonfarm productivity numbers were up, confirming this corporate strategy.


The Congressional Budget Office recently offered an analysis of the administration’s budget estimates. CBO’s findings were that the federal government would record deficits of $1.5 trillion in 2010, and $1.3 trillion in 2011. The cumulative deficit to 2020 would be $9.8 trillion, and public debt by 2020 would be $20.3 trillion. Finally, net interest on debt would grow from the current 1.4% of GDP, to 4.1% in 2020.


The IRS released IR-2010-1, on January 4, 2010, which proposes standards for paid tax preparers, including CPA’s, attorneys, and enrolled agents. The proposed standards include a registration requirement, a competency testing requirement, and a continuing education requirement. It appears that companies specializing in registrations, testing, and education stand to benefit. Under the proposed guidelines, the IRS will conduct preparer visits and sporadic compliance checks.


On the tax front, Congress continues to be desperate for new revenue. In the crosshairs are profit distributions from Sub-S corporations. Look for new taxes on these funds. A district court in Michigan has ruled that severance pay for downsized employees isn’t subject to Social Security taxes, specifically repudiating an Appeals Court analysis. The IRS is irritated. Look for an IRS appeal.


More than 90% of most personal financial statements are comprised of business interests, real estate, or other long term investments. Most charitable giving is done from the cash and equivalents portion, which represents less than 10% of assets for most households.


There are wonderful planning tools and strategies that allow the charitable gifting of assets, in a way that cares for the household, and has a major positive impact on charitable organizations. It’s immaterial whether the asset is real estate, privately held or publicly traded stock, or financial assets such as life insurance or IRAs. If you would like to receive a short PowerPoint that reviews a few of these ideas, respond to this commentary, and we will get it to you.


Quote of the week:

“A taxpayer is someone who works for the government without taking the civil service exam.”
                                                                                                Ronald Reagan